Study Questions on revenue Recognition
1. Franchisors can earn income from:
a. initial franchise fees and continuing periodic fees.
b. initial franchise fees but not continuing periodic fees.
c. continuing periodic fees only.
d. continuing periodic fees, but only to the extent they exceed the
initial franchise fee.
a (Franchise fees, pp. 606 & 1028-9)
2. To
as
a.
b.
c.
d.
be recognized, revenues need not necessarily be realized so long
they are
earned.
realizable.
relevant.
reliable.
b (Recognition of revenue, pp. 44-6)
3. Which of the following statements is true?
a. The percentage-of-completion method is more conservative than is
the completed-contract method.
b. The completed-contract method is more conservative than is the
percentage-of completion method.
c. Over the entire term of the contract, the percentage-ofcompletion method will result in the recognition of more revenue
than will the completed-contract method.
d. Over the entire term of the contract, the completed-contract
method will result in the recognition of more revenue than will
the percentage-of-completion method.
b (Long-Term Construction Contracts, pg. 1005-10)
4. When applying the percentage-of-completion method, how is the
percentage-of-completion determined?
a. By dividing cost to complete by cost incurred this year.
b. By dividing cost incurred this year by cost incurred to date.
c. By dividing cost incurred to date by total estimated costs.
d. By dividing cost incurred to date by costs to be incurred in the
future.
c (Long-Term Construction Contracts, pg. 1006)
5. When is it appropriate to value inventory at net realizable value?
a. When management wishes to recognize revenue prior to sale
b. When the company is in the middle of producing an actively traded
commodity for which it is possible to reliably estimate
completion costs
c. When the inventory has been sold, but cash has not yet been
collected
d. When no market exists for the product
b (Commodities, pp. 457-8)
6. Recognition is the process of formally incorporating an item into
the financial statements of an entity as an asset, liability,
revenue, or expense. Recognition criteria include all of the
following except
a. measurability.
b. definitions of elements of financial statements.
c. decision usefulness.
d. relevance.
c IMA 12/90, 2-18 [Revised]
(Recognition, pg. 44-7)
7. Hall Company owns an office building and leases the offices under a
variety of rental agreements involving rent paid monthly in advance
and rent paid annually in advance. Not all tenants make timely
payments of their rent. Hall's ending balance sheets contained the
following data:
Rentals receivable
Unearned rentals
2001
$ 6,200
12,000
2000
$ 4,800
16,000
Increase
$ 1,400
( 4,000)
During 2001 Hall received $40,000 cash from tenants. How much rental
revenue should Hall recognize for 2001?
a. $34,600
b. $37,400
c. $42,600
d. $45,400
d CPA 11/85, P-36 [Revised]
(Revenue recognition, pp. 44-6)
Rents receivable increased because Hall Company accrued
(earned)$1,400 more rental income than was paid on time.
Similarly, from other clients Hall Company earned $4,000 more in
rent payments than was received during 2001.
Total cash payment received
$40,000
Add: Increase in rent accrued but unpaid
1,400
Decrease in Unearned rentals
4,000
Total rental revenue earned
$45,400
8. Marr Corp. reported rental revenue of $2,210,000 in its cash
basis federal income tax return for the year ended November 30,
2000. Additional information is as follows:
Rents receivable--November 30, 2000
Rents receivable--November 30, 1999
Uncollectible rents written off during
the fiscal year
$1,060,000
800,000
30,000
Under the accrual basis, Marr should report rental revenue of
a. $1,920,000
b. $1,980,000
c. $2,440,000
d. $2,500,000
d CPA 5/91, P-48
(Revenue recognition, pp. 44-6)
9. Gow Constructors, Inc. has consistently used the percentage-ofcompletion method of recognizing revenue. In 2000, Gow started work
on an $18,000,000 construction contract that was completed in 2002.
The following information was taken from Gow's 2000 accounting
records:
Progress billings
Costs incurred
Collections
Estimated costs to complete
$ 6,600,000
5,400,000
4,200,000
10,800,000
What amount of gross profit should Gow have recognized in 2000 on
this contract?
a. $1,400,000.
b. $1,200,000.
c. $ 900,000.
d. $ 600,000.
d CPA 11/90 PII-15
(Long-Term Construction, pp. 1005-9)
10. Long Corp. began construction work under a 3-year contract this
year. The contract price is $800,000. Long uses the percentageof-cost -completion method for financial reporting purposes. The
income to be recognized each year is based on the proportion of
costs incurred to the estimated total cost of the construction
project. The following financial statement presentations relate
to this contract at December 31 of the first year:
BALANCE SHEET ITEMS
Cash
Accounts Receivable
Construction-in-Process
Less Billings on Construction-in-Process
Construction-in-Process, Net of Billings
$
??
15,000
$ 50,000
(47,000)
3,000
INCOME STATEMENT ITEM
Income (before tax) on the
contract recognized in year 1
$10,000
How much cash was collected in the first year on this contract?
a. $15,000
b. $32,000
c. $35,000
d. $47,000
b CPA 5/75, P-13
(Long-Term Construction Contracts, pp.
1005-9)
Total Billings on Construction Contracts
$47,000
Less Accounts Receivable (unpaid contract billings)
15,000
Cash collections on Construction Contracts
$32,000
The unadjusted balance in the account titled "Billings on
Construction-in-Process" indicates the customer has been billed
$47,000 to date. Since the unpaid amount ($15,000) is
represented by the balance in Accounts Receivable, collection
must have been $32,000.
11. In accounting for a long-term construction contract using the
percentage-of-completion method, the account "Billings on
Construction in Process" is a
a. contra current asset account.
b. contra noncurrent asset account.
c. noncurrent liability account.
d. revenue account.
a CPA 11/85, T-28
(Long-Term Construction, pp. 1009)
12. Gow Constructors, Inc. has consistently used
completion method of recognizing revenue. In
work on an $18,000,000 construction contract
in 2002. The following information was taken
accounting records:
Progress billings
Costs incurred
Collections
Estimated costs to complete
the percentage-of2000, Gow started
that was completed
from Gow's 2000
$ 6,600,000
5,400,000
4,200,000
10,800,000
What amount of gross profit should Gow have recognized in 2000 on
this contract?
a. $1,400,000.
b. $1,200,000.
c. $ 900,000.
d. $ 600,000.
d CPA 11/90 PII-15
(Long-Term Construction, pp. 1005-9)
13. When should an anticipated loss on a long-term contract be
recognized under the percentage-of-completion method and the
completed-contract method, respectively?
Percentage of completion
Completed-contract
a. Over life of project
Contract complete
b. Immediately
Contract complete
c. Over life of project
Immediately
d. Immediately
Immediately
d CPA 11/87, T-16
(Long-Term Construction Contracts, pp.
1105-9, and Conservatism, application, pp. 1011-14)
Regardless of the method used to recognize revenue, an
anticipated loss is recognized during the year the conditions
giving rise to the loss are discovered or identified.
14. Amar Farms produced 300,000 pounds of cotton during the 2000
season. Amar sells all of its cotton to Brye Co., which has
agreed to purchase Amar's entire production at the prevailing
market price. At the time of production, the market price was
$0.70 per pound. Amar's costs of selling and distributing the
cotton are immaterial and can be reasonably estimated. Amar
reports its inventory at expected exit (sale) value. During 2000,
Amar sold and delivered to Brye 200,000 pounds at the market
price of $.70. Amar sold the remaining 100,000 pounds during 2001
at the market price of $.72. What amount of revenue should Amar
recognize in 2000?
a. $140,000
b. $144,000
c. $210,000
d. $216,000
c CPA 11/90, PII-6 [updated] (Commodities, pp. 457-8)
Amar farms is a producer of agricultural products. For fungible
crops that can be stored for significant periods, revenue is
recognized at production as a matter of industry practice. The
availability of global, competitive, liquid markets for
agricultural products is a major consideration in this practice.
Accordingly, Amar Farms should recognize revenue of $210,000
[300,000 pounds @ $0.70 per pound]. The critical event is
production, the majority of costs have been incurred, and any
remaining costs can be estimated with good accuracy. Any holding
gains or losses are labeled as such and are not part of revenue.
During 2000, Mitchell Corp. started a construction job with a
total contract price of $600,000. The job was completed on
December 15, 2001. Additional data are as follows:
Yearly
Data
as of
12/31
2000
2001
15.
Total
Contract
Price
$600,000
$600,000
Cumulative
Billings
Through
Year End
$240,000
$360,000
Cumulative
Collections
Through
Year End
$200,000
$400,000
Cumulative
Cost Incurred
Through
Year End
$225,000
$480,000
Estimated
Additional
Costs to
Complete
$225,000
0
Under the completed-contract method, for 2001 Mitchell would
report gross margin of
a. $120,000.
b. $120,000).
c. $240,000.
d. $105,000.
e. $ 45,000.
a CPA 5/90 PII-41 [Revised]
(Long-Term Construction
Contracts, pp. 1011-2)
Revenue from construction activities
$ 600,000
Construction expense
480,000
Gross margin
$ 120,000
16.
17.
18.
Under the completed-contract method, Mitchell would report gross
margin for 2000 of
a. $ 15,000.
b. $ 75,000.
c. $150,000.
d. None of the above.
d (Long-term Construction Contracts, pp. 1010-11)
The contract is not completed during 2000, so there is neither
revenue nor related expense to be reported on this contract
during that year.
Under the percentage-of-completion method, Mitchell would report
gross margin for 2000 of
a. $15,000.
b. $75,000.
c. ($ 5,000).
d.
($25,000).
e. None of the above.
b (Long-term Construction Contracts, pp. 1005-9)
Revenue
$ 300,000 [$600,000 x $225,000/$450,000]
Construction expense
225,000
Gross margin
$ 75,000
Under the percentage-of-completion method, Mitchell would report
gross margin for 2001 of
a.
$120,000.
b.
$ 75,000.
c.
$105,000.
d.
$ 45,000.
e.
None of the above.
d (Long-term Construction Contracts, pp. 1005-9)
Total contract price
$600,000
Revenue recognized in 2000
300,000
2001 Revenue
$300,000
Construction expense for 2001
255,000
Gross margin, 2001
$ 45,000